Why did the post-war welfare state fail to prevent the growth of inequality?
Howard Glennerster, London School of Economics
One answer is that it was never designed to. Beveridge's 'Social Plan' (1) did foresee full employment and proposed that those who were not able to be employed in retirement, sickness or other legitimate reasons should receive a basic minimum income. The whole population should have access to free schooling, health care and a decent standard of housing. These would provide a floor on which individual endeavour could build and be rewarded. It would bring minimum security for all but not equality. Beveridge was at pains to make this clear.
Those on the left of the Labour Party in the 1940s urged it not to get carried away by concern with welfare policy. Lasting changes to the unequal structures of power and income could only be achieved through the public ownership of industry and the banks, they argued. (2)
Even supporters of the basic idea of welfare pointed out that the actual form the post war institutions had taken, and the way they were financed, had actually advantaged the middle class most. The poorer manual class before the war already had free primary medical care, hospital care on a means-test basis and free elementary education. Their extension to the whole population benefited those on slightly higher incomes most. (3) Conservative critics, both at the time and subsequently, have argued that trying to establish an expensive welfare state, when Britain was still economically weak actually disadvantaged the poor as it crippled the UK economy. (4)
The truth is more complex than any of these contentions:
- Post-war full employment did significantly narrow the gap between rich and poor until it began to grow again in the 1980s. Then the improved safety net put in place in the 1940s prevented a repeat of the misery of the 1930s.
- The welfare state did not bankrupt the UK. Other European nations all went on to establish even more generous social provisions than the UK and their economies performed better. Social services did benefit the middle class but their inclusion and support has been important in sustaining the political appeal of these services.
- It is still true that the poor benefit far more from these services especially as a share of their real incomes. Widespread public ownership in eastern Europe did not provide either growing living standards or equality. But the early socialist sceptics were also right. Technological change and the UK's dependence on international trade were to powerfully widen the distribution of earned income and this was very difficult to reverse.
- Yet the welfare state has massively cushioned the impact of income inequality. If we compare the original incomes of the richest fifth with the lowest fifth we find they gain16 times the annual incomes of the poorest fifth. That is before taxes are paid and the value of cash benefits and services received are taken into account. When we include the impact of the welfare state we find the richest fifth have only four times as much effective income as the poorest fifth. (5)
I recently tried to quantify the impact of these contrary forces - rising income inequality in the market place on the one hand and extensions to the welfare state on the other - going back to 1937. (6) I did so by reworking, on as common a basis as I could, studies undertaken over that period and with the help of unpublished information from the Office of National Statistics.
In the table below I summarise and update those results. The figures presented include a measure of inequality invented by an Italian economist a century ago and now widely used to measure overall inequality - the Gini coefficient. Perfect equality is represented as 0 - there are no differences from the average income. Complete inequality - all of the nation's income gained by one person - is represented by 100 in my table.
We can see from the first column that between 1937 and 1949 there was a significant fall in inequality in pre-tax incomes. In contrast to 1937 there was virtually no long-term unemployment in 1949. Manual labour was in high demand. Trade unions were powerful. These conditions began to unwind, and then did so rapidly in the 1980s. The level of inequality represented by a Gini coefficient of 50, reached by 1995, is one of the very highest among the advanced economies.
What impact on all this has the welfare state made?
The second column in the table below shows how far inequality has been reduced by people receiving cash benefits. The third shows the impact of taxes both direct (on income) and indirect (e.g. VAT). The former taxes the rich more heavily and the latter impose more burdens on the poor. The effect of the two types of tax now tends to cancel out. The final income column reflects the fact that people get substantial economic benefit from receiving free health care and other services. The value to each of the sample households is calculated. This further reduces inequality.
In 1937 social policy reduced overall inequality by about a quarter. The post-war welfare state in 1948 reduced the, by then, more equal original market incomes by nearly a half - almost twice as much as in 1937. Despite the growing inequality in original incomes since then, social policy has continued to reduce inequality by a similar percentage. In absolute terms the reduction in inequality is bigger than in the 1940s just because the problem is bigger. In 1949 the overall Gini coefficient was reduced by 12 points. In 2005/6 it was reduced by 22.
So welfare state benefits in cash and kind have significantly cushioned the impact of both the big structural changes that took place in the British economy in the 1980s and has had to work harder to contain the growing income inequality that took place afterwards. But taxation has done less than it might.
|Original income||Income after benefits||Cash income after taxes||Final income with services||Reduction in inequality (absolute)||Reduction in inequality (per cent)|
- Social Insurance and Allied Services, Cm 6404 (London, 1942). Back to (1)
- R. Miliband, Parliamentary Socialism (London, 1961). Back to (2)
- B. Abel-Smith 'Whose welfare state' in Conviction, ed. N. MacKenzie (London, 1958). Back to (3)
- C. Barnett, The Last Victory: British Dreams and British Realities (London, 1995) Back to (4)
- F. Jones 'The effects of taxes and benefits on household income 2003/4' Economic Trends vol. 620 (London, 2005) pp 15-61. Back to (5)
- H. Glennerster, British Social Policy 1945 to the Present (Oxford, 2007) see p 269-74. Back to (6)
- Glennerster, British Social Policy and ONS data. Back to (7)